If there’s been one constant for JD.com (NASDAQ:JD) stock since its 2014 IPO, it’s been volatility. The chart of the JD stock price looks like a roller coaster and admittedly not a terribly pleasant one at that.
Source: Daniel Cukier via Flickr
JD.com stock has returned about 41% from its $19 IPO price. But that’s only a 7% or so annual return over the five years – and JD.com has gained 6%, total, from its first-day close just shy of $25.
To be sure, some traders have done better or worse. The round-trip in the JD.com stock price from below $20 in 2016, to $50 18 months later, and back below $20 late last year created opportunities for longs and shorts alike. External factors, most notably of late, on-again, off-again trade war worries, have driven much of the volatility, particularly over the last eight months.
That volatility is likely to continue, not just for JD but other Chinese plays. But in the case of JD, patience seems likely to pay off. At the same time outside noise seems to be getting louder, JD.com’s performance is getting stronger. Once that noise dies down, the stock seems likely to rise.
Another Strong Quarter Boosts JD.com Stock
First quarter earnings from JD.com certainly seem to strengthen the long-term case. Both sales and earnings per share crushed analyst estimates. Revenue rose a solid 21% – even if that figure admittedly was the company’s lowest growth rate since going public. Operating margins in the core business – now referred to as JD Retail – expanded a solid 60 bps year-over-year.
The quarter isn’t perfect. As The Motley Fool pointed out, even JD.com CEO Richard Liu admitted on the post-earnings call that profit in the quarter was “a little bit high.” Slowing sales growth is a function in part of JD.com’s increasing size, but the increase in revenue also was notably lighter than that of larger ecommerce rival Alibaba (NYSE:BABA).
Still, the quarter seems like good news. Most notably, it seems to confirm the bullish thesis for JD.com stock that came out of a similarly strong fourth quarter report. As I wrote after that release, JD.com seemed to have clarified and strengthened its story after Q4. Worries about operating margin compression were explained by increased detail about investments in other areas, and the broader strategy seemed an echo of that of Amazon.com (NASDAQ:AMZN), focusing on revenue growth above margins.
Given how successful that strategy has been for Amazon, both in terms of its growth and its stock price, the path chosen by JD.com seemed similarly attractive. A second straight blowout quarter, meanwhile, confirms that the strategy is on track.
External Factors and JD.com
The report seemingly has done little for JD shares. JD.com actually is down 10% in just the last month and threatens a three-month low as I write this. It trades below levels seen ahead of the release.
The problem, again, is external. JD.com spent the second half of 2018 pretty much in freefall owing mostly to fears about the Chinese economy and the impacts of the U.S.-China trade standoff. The possibility of a U.S. hike to 25% tariffs resurrected those concerns.
It’s not just JD.com that is selling off, either. BABA shares are down over 20% in less than four weeks. Baidu (NASDAQ:BIDU) is at a multi-year low, albeit with some help from disappointing earnings. iQiyi (NASDAQ:IQ), 58.com (NYSE:WUBA), and other Chinese plays all have pulled back as well.
Relative to other Chinese stocks, in fact, JD.com stock actually has performed reasonably well. But the recent declines again show that it’s impossible to separate JD.com from broader sentiment towards China.
With no apparent momentum toward a trade war resolution, and another U.S. presidential election now less than 18 months away, it’s likely sentiment toward the Chinese economy is going to stay rather volatile for the foreseeable future.
JD Stock on the Other Side
Long-term, the case for JD stock still looks attractive. But some investors may choose to either sit out near-term volatility – or look to profit from it. Put premiums for JD.com aren’t particularly high at the moment, but selling the June 2020 25 strike still returns nearly 17% – while locking in a purchase price of $21.50 per share.
Traders can also look to shorter-term strikes to either gain premium or capture a below-market price for JD if external fears drive another leg down in the stock.
That said, investors shouldn’t let those external fears overshadow the fact that JD.com, as a company, looks to be in an excellent position. As large as China’s ecommerce industry is, and will be, second place likely is good enough.
Efforts in brick-and-mortar retail and other investments haven’t paid off yet – but some will over time. The combination of a lower share price and margin expansion has made valuation more reasonable: JD now trades at roughly 25x 2020 consensus EPS. That’s likely too low given the company’s opportunities.
That multiple can get lower, however, particularly if broad market fears grow. And it’s likely the road for JD stock going forward will be bumpy. I still believe investors willing to ride out the volatility will be handsomely rewarded in the end. But trading in JD over the last few weeks shows it will take some patience – and possibly some nerve.
As of this writing, Vince Martin has no positions in any securities mentioned.
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